PARIS (Bloomberg) -- PSA/Peugeot-Citroen CEO Philippe Varin plans to step down next year and hire former Renault Chief Operating Officer Carlos Tavares as his replacement, two people familiar with the matter said.

Varin, 61, wants Tavares to initially serve as his No. 2 while he focuses on completing talks with Dongfeng Motor Corp. to expand an existing partnership, said the people, who asked not to be identified because the search has not yet been made public.

Tavares, 55, hasn't yet signed a contract and the Peugeot board would still need to approve an agreement, one of the people said. Pierre-Olivier Salmon, a Peugeot spokesman, declined to comment.

Tavares, 55, left Renault at the end of August after saying he would like to run another automaker.

Dongfeng deal

The search comes as the French manufacturer, which reported a first-half operating loss of 510 million euros ($690 million) in its automotive unit, tries to partner with Dongfeng or another automaker to lower its reliance on Europe, where it sells more than 50 percent of its vehicles. Peugeot has proposed a capital increase of at least 3 billion euros, in which Dongfeng and the French state would take equal holdings of about 20 percent, people familiar said last month.

Separately, Varin told a German newspaper Die Welt that it would "make sense to deepen the partnership" with Dongfeng

"I won't rule anything out," he told the newspaper in an interview. PSA has so far consistently declined to comment on the Dongfeng talks or capital increase plan.

Asked about the reported plans for Dongfeng to take a stake in a capital increase, Varin told Die Welt: "First you have to find the right industrial projects, then you worry about the necessary financing. You shouldn't put the proverbial cart before the horse."

Small stake

The Dongfeng plan, however, has hit a snag as Chinese automaker seeks a smaller stake than first discussed, people familiar with the matter said last week.

Dongfeng is weighing buying about 10 percent, half the size of the original proposal, said the people, who asked not to be identified discussing private talks. The Chinese company is more interested in expanding an existing industrial venture than purchasing a stake, they said.

"If PSA wants to raise equity then I think it makes sense to show to the market that you're willing to make some big changes," Erich Hauser, a London-based automotive analyst with International Strategy & Investment Group, said in an e-mail. "Putting in place a new CEO would send just that message to investors and Dongfeng."

French newspaper Le Figaro reported that PSA plans to hire Tavares to replace Varin. Tavares didn't immediately respond to a request from Bloomberg for comment.

Tavares left Renault at the end of August, two weeks after Bloomberg published an interview with him saying that he would like to run another automaker because CEO Carlos Ghosn, 59, planned to stay for the foreseeable future.

PSA hired Varin as CEO in 2009. He received a 4-year contract extension on March.

Factory closing

PSA hired Varin as CEO in 2009, following the departure of Christian Streiff, and his contract was renewed by the supervisory board on March 12 for another four years. Varin declined to comment on succession plans when asked about the matter Saturday at a conference in Berlin.

Under Varin's tenure, PSA has announced a plan to cut investments, eliminate 11,200 jobs and close a factory on the outskirts of Paris to stem losses and cut industrial overcapacity. The CEO also trimmed PSA's management board to four executives from six to streamline operations.

More recently, he signed a three-year labor agreement with the company's unions to reduce overtime pay and freeze salaries in exchange for investment guarantees and a pledge not to close any French factories before 2016.

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